It’s been long and winding road, three years in the making, but the recent policy announcement by the Financial Conduct Authority (FCA) has confirmed that the practice of increasing prices for existing customers; so loyal customers end up paying more than new customers, must stop. As a result, insurers will need to equalise new and renewal pricing by the end of the year and from 2022 onwards will no longer offer heavy discounts to new customers.
This eradication of this so-called loyalty penalty will be welcomed by many customers, not least the six million customers that the FCA estimate are paying it. Although there is a great deal of uncertainty about how insurers will react. For customers who regularly switch at the end of introductory discounts this will most likely mean higher prices in the short-to-medium term. On the other hand, customers who regularly renew with the same insurer should pay less. Overall, the FCA believe that these measures will save customers £4.2 billion over ten years.
One immediate impact we are likely to see is increased polarisation in customer behaviour. Those who regularly switch are likely to continue shopping around for the best deals, while those who only occasionally switch and those who automatically renew, are likely to become less active. Overall, switching levels that according to our Financial Research Survey (FRS) have slowly been edging higher in recent years, reaching 29% for motor insurance and 23% for home insurance, are likely to reduce.
In the longer term what the FCA wants is for insurers to adopt simpler and more transparent pricing so that the quote a customer receives should reflect costs and not be subject to change without good reason. The FCA has also made it clear that embedding this fair value principle should cover every aspect of what the sector does not just pricing.
The sector has spoken about the need to become more customer-centric in this respect for years. However, in a crowded price-driven market many insurers have found it difficult to distinguish between price and value. Instead, most have defaulted to finding ways to compete on price.
The changes by FCA are therefore a big opportunity for insurers to go beyond price and compete on other factors such as service, product and branding. This in turn could change customer expectations around what they want from their insurance relationship and move some of the focus away from price.
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